Disastrous Tax Mistakes Made by People That Work from Home
March 13, 2018
Granted, working from home—either occasionally or full time—provides plenty of ways to save on taxes. But within those opportunities lie pitfalls galore that could also land you in an audit. To help you stay on the right side of that equation when filing this year, heed these top tax mistakes people make when they work from home—plus whether any rules change next year once President Donald Trump's new tax plan is in full swing.
1. Thinking credit card statements are sufficient to prove expenses
Do you blithely toss receipts because you consider your credit card statement to be adequate proof of your expenditures? You could be in trouble if you’re one of the unlucky people to get audited.
“The IRS will not accept credit card statement as backup because they do not show itemized details of what was purchased,” says Miller. For example, say you have a charge from an office supply store for $1,500 on your credit card. The IRS cannot determine if you were buying legit office needs or computer components for your teen.
Plus, remember that in an audit, the burden of proof still remains on the taxpayer to prove or substantiate expenses. So, keep saving those receipts! Apps abound so you don't have to stuff them in a shoebox; one's even called Shoeboxed, which scans and saves them for future reference.
For more smart financial news and advice, head over to MarketWatch.
2. Taking too many suspicious deductions
On the other hand, some freelancers put themselves at risk of an audit by trying to write off bogus expenses, Zimmelman cautions.
“In order for an expense to be deductible, it must be ‘ordinary and necessary’ to run your business," he says. Just because you’re at home while you work doesn’t mean you can write off that fancy new espresso maker, for example; nor should you write off lunch with your spouse at that fancy bistro down the street (unless you're in business together).
3. Commingling personal and business spending
Too many work-at-home professionals miss out on deductions because their finances are in serious disarray, Zimmelman finds. An easy solution is to carefully track business spending by setting up separate checking, savings, and credit card accounts.
You also need to keep meticulous records of what equipment is used for business activities and what is personal. So, for example, if you have one cellphone for both professional and personal use, you can deduct a percentage of the expenses on your tax return, based on the percentage of use.
“You’ll need detailed call logs or other documentation to back that up,” he warns.
For 2018 onward, accurate records are still important, but if you’re an employee who files your tax return on Schedule A, that 2% cap might mean you lose some of the deductions you enjoyed in the past.